NEW THEORIES OF THE FIRM (ENTREPRISE)
1. Standard neoclassical model of the firm
 Unity of ownership and managerial functions (the owner as both decision
maker and risk taker)
 Economic rationality (homo oeconomicus) – striving for maximization of
trading profit (objective function) under the budget constraint
 Homogenous product
 Perfectly divisible and substitutable production factors (as consequence,
production factors perfectly transferable)
 Perfect information
 Perfect predictability of future and the lack of risk or perfect risk
management
 Zero profit hypothesis (with respect to enterprises operating under
conditions of the so called contestable competition)
 No social costs (negative external costs)
 No transaction costs
 Enterprise as the so called "black box”
2. Main directions of critique of neoclassical enterprise theory
 Critique of utility maximization hypothesis
 Enterprises operate under circumstances of risk and uncertainty
 In big, as well as in medium-size enterprises, there occurs the diffusion of
ownership which leads to differences in objective functions, available
information, risk exposure etc.
 Big enterprises are frequently characterized by the separation of
ownership and managerial functions
3. Alternative models of enterprises (as attempts at revealing the "interior
of black box")

Managerial models of enterprise
- specific utility function of managers
- (potential) change of enterprise's objective function:
1. Model of enterprise aiming at maximizing the revenues from sale
(W.J.Baumol)
2. Model of enterprise striving for maximization of sustainable
(balanced) growth rate (R. Marris)
 Model based on the concept of x –inefficiency (H.Leibenstein)
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- point of departure: „efficiency gap” as the difference between actual
costs and potentially lowest costs
- diversified reasons for x-inefficiency (mostly caused by imperfect
information, weak competition pressure and opportunistic behaviors)
- „selective rationality" of employees, managers, etc.
 Behavioral model of enterprise (R.M.Cyert, J.G. March)
- point of departure: rejection of utility maximization hypothesis and
adopting the concept of satisfycing behavior of H. Simon
- objective: construction of a model of firms acting on imperfectly
competitive markets and under conditions of general uncertainty
- enterprise is not a black box but constitutes the coalition of various
entities and groups whose objective functions are different
- fundamental problem: conflicts of interest between various groups of
stakeholders
- all groups strive for solutions which are for them satisfycing and not
optimal from the point of view enterprise as the whole
 Allocative enterprise theory
- starting point: transaction costs theory
- enterprise arises to minimize the market transaction costs (it
determines the optimal enterprise size)
- enterprise is a mechanism for allocation the resources between defined
goals and manners of attaining them (alternative mechanism vis-à-vis
market)
 Agent and Principal Theory based concept of enterprise
- starting point: Agent and Principal Theory
- information asymmetry and opportunistic behaviors related to
informational advantage
- individual interest groups act under conditions of uncertainty and it is
therefore impossible to unambiguously determine the input-output
relations
- agent's remuneration (reward) depends on: 1) expected result of his/her
activity or 2) manner of his/her behavior (performance)
 Resource based theory of enterprise
- it is connected both with economic theory and -mostly - with
management science (strategic management in particular)
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- point of departure: broad interpretation of resources (physical,
financial, factors determining the quantity and quality of human
capital, volitional and psychological factors, knowledge and
information)
- resources (alike production factors) are characterized by mobility,
complementarity and, on the other hand, a certain scope of
substitutability
- building a competitive advantage of enterprise consists in: 1)
incrementing (with respect to both quantity and quality) its resources
and 2) looking for and exploring new opportunities to apply them
 Competence theory of enterprise (concept of learning enterprise)
NEW CURRENTS IN THE THEORY OF MARKET AND
COMPETITION
1. Standard
models
of
market/competition:
market
competition, monopoly, monopolistic competition,
with
perfect
duopoly and
oligopoly
2. Markets with imperfect competition
 Concept of markets with asymmetric distribution of information
(G.A.Akerloff)
- tenderers (producers, sellers) and purchasers have diversified
information concerning prices and quality corresponding to respective
levels of prices
- informational advantage of tenderers with regard to the quality of
goods leads to negative selection of firms
- equilibrium on a given market emerges but is distorted as compared to
perfect competition situation

Concept of market unequlibrium (new microeconomics)
- as the first concept, also based on the assumption of
imperfect/incomplete information (G.J.Stigler, A.A.Alkian)
- subsequent assumption: informational imperfections can be diminished
but its entire removal does not ensue because high costs of such
removal make it economically irrational
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- outcome of above mentioned process: prices do not equalize demand
and supply (no price driven market clearing)
- it mostly relates to the cases when due to high costs it is not worth to
precisely calculate the level of demand (in particular on goods being
characterized by very changeable demand) in order to strictly (a) adjust
supply to demand by a given price or (2) adjust price to a given supply
3. Competition as a process (L.Misses, A.von Hayek)
 Competition as a catalactic process
- Competition means not the state of the market but a continuous
process of rivalry
- Competition refers to the access to scarce resources or to the
exploration of new resources and/or new manners of their use
- competition as a process consists in acquiring information and
attaining private benefits owing to it
- competition has a spontaneous character but proceeds according to
commonly accepted rules
- a special case here is the concept of J.A. Schumpeter: competition as
the process creative destruction
 Competition as an evolutionary process (evolutionary economics,
evolutionary model of enterprise: R.R.Nelson and S.G.Winter,
A.A.Alchian/M.Friedman)
- generally: reference to the evolution theory, both of Darwin and based
on modern genetics
- competition as a process of natural selection of firms and their
adaptation to changing conditions of the business environment;
adaptation takes place through innovations and imitation of other
enterprises' activities
- the notion of routine as counterpart of genotype in the biological
evolution
- development of enterprises means looking for a new routine; it ensues
through innovations, imitation, takeovers (of enterprises or their parts),
personal mobility. New routine may be interpreted as the change of
genotype in biology or the mutation
- mutation consists mostly not in finding optimal but only satisfycing
(H. Simon' theory satisfycing behavior) solutions
- new routines are usually not distant from old routines (Nelson/Winter)
because search for them is typically based on standard knowledge and
experience of enterprises
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4. Theory of contestable competition (W.J.Baumol and others)
 Potentially competitive market has a number of features of perfectly
competitive market
- lack of entry and exit barriers
- lack of costs of entry and exit (sunk costs = 0)
- date of entry is meaningless from the point of view of competitive
position
- lack of entry/exit barriers and following conclusion that sunk costs = 0
means the existence of permanent competitive pressure both for
enterprises operating under conditions of monopolistic competition
and (even) having a full monopoly position
- potential competition leads (theoretically) to the same results as perfect
competition
- equilibrium is effective even for the case that there is a small number
of tenderers or the goods being offered are not homogenous
5. Theory of innovation and competition of J.A. Schumpeter
 generally: a kind of evolutionary theory
 general foundation for the competition are innovations and structural changes
in the economy
 point of departure: distinction between economic statics and dynamics
 dynamics stage (evolution, development): central category for this stage is
the entrepreneur and innovations (very broad understanding of innovations))
 triad: inventions → innovations → imitation ( diffusion of innovations)
 innovation as the source of entrepreneurial profit
 development as a process of creative destruction
 innovation and the spirit of entrepreneurship in the light of business
concentration process and "managerial revolution"
ELEMENTS OF MICROECONOMIC CALCULUS
1.Rationality, effectiveness, efficiency and optimization in economic activity
 institutional conditions of microeconomic rationality (the existence of market
economy as a prerequisite for economic rationality)
 physical (material) and methodological rationality
 rationality and effectiveness
 efficiency as a scalar magnitude (as element in the set of
potential/permissible values/solutions)
 optimality as a conditional maximum/minimum
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 Search of optimal solutions as a general model of microeconomic behavior
(in neoclassical economics)
 Static and dynamic optimality; analytical tools for the solution of
optimization problems;
 Optimality versus micro- and macroeconomic equilibrium; the notion of the
so called representative agent/entity in macroeconomic optimization
problems
 Microeconomic rationality and Maximization Utility Hypothesis - main
directions of modifications and criticism
 Hypotheses of financial markets effectiveness - the nature and criticism in
the context of contemporary financial crisis
2. Standard understanding of costs in production and consumption
(household) theory and the social costs




Theory of external effects and external costs
Technological versus market external effects (costs)
Methods of external costs internalization
Social costs of enterprises. Social costs and competitiveness
3. Transaction costs




Definition and types of transaction costs
Transaction costs as real costs of enterprises and of the market
Transaction costs and the size of enterprise
Transaction costs and the evolution of economic systems
4. Cost-Benefit Analysis (CBA) as foundation for economic choice (in the
micro- and macroeconomic scale)
 CBA and market valuation of potential solutions and the choice of optimal
solution
 Most important areas of CBA
 Methods of valuations of non-market costs and benefits (the case of
environmental costs and benefits)
 Maximization of NPV and benefits per unit effect and minimization of costs
per unit effect as principles of choosing best project/strategy in CBA
DISCUSSION ABOUT THE ROLE OF STATE IN ECONOMY: THE
STATE AS ECONOMIC ENTITY
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1. Market and state as mechanisms of co-ordination and optimization of
economic activity in the macroeconomic scale




Institutional dichotomy: perfect market versus perfect state
Paradigm of market versus paradigm of state
Institutional dichotomy: imperfect state versus imperfect state
Interdependence of market failures and state failures
2. Nature of economic function of the state from the perspective of market
paradigm
 perfect competition as the mechanism leading to social welfare
maximization (Pareto optimum)
 Nature of market failures and their types
 Market failures as the reason for public regulation in market economy
3. Public regulation from the point of view of market paradigm
 Broad and narrow definition of public regulation
 Public regulation and macroeconomic stabilization.
 Regulation of "real economy" versus regulation of financial markets
(financial flows) - financial regulation in the light of globalization of
financial markets
 Public regulation and social regulation
 Main instruments (tools) of public regulation (with respect to "real
economy")
 Normative and economic approach towards the public regulation
4. Economic function of the state in the approach of state paradigm
 Point of reference: rejection of perfect market model and the view about its
unreliability as the mechanism of social welfare maximization
 Diversification of reasons for and the scope to which the state should assist
(permanently or temporarily) the market mechanism (Keynesian economics,
Marxist economics, institutional economics, various streams in economics
thought in developing countries)
 Role of the state in the ordoliberalism
5. Imperfect market versus imperfect state
 sources of failures of the state as the coordinative and optimization
mechanism
 interdependence of state failures and market failures
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 State as a quasi market and the critique of optimization functions of the state
(dispute about the economic rationality under socialism and the critique of
socialist command-and -control economic system within the neoclassical
comparative economic studies)
6. Four levels of state's influence upon the economy




public regulation
macroeconomic stabilization
microeconomic and institutional regulation
structural and growth policy, and its components in the approach of market
paradigm and state paradigm
 controversies about distributive functions of the state (with special regard to
current financial and economic crisis)
7. Economic functions of the state under conditions of globalization and
emergence of the so called New Economy
7.1. Changing significance of business cycles related and structural factors in
the contemporary economic development
 Transnational corporations
 Changing character of capital markets under the influence of modern
information and communication technologies
 Globalization of financial markets and its increasingly autonomous
character with respect to real economy (production and distribution of
goods and services)
 Regional economic integration
7.2. The need for looking for and defining economic functions of the state in
heterodox economic streams





Theory of Sustainable Development
New Economic History
Complexity economics
Evolutionary economics
Ordoliberalism
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